1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of The Securities Exchange Act of 1934 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 [ ] TRANSITION REPORT PURSUANT OR SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-7770 MCCLAIN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Michigan 38-1867649 State of Incorporation IRS Employer I.D. No. 6200 Elmridge Road Sterling Heights, Michigan 48310 (810) 264-3611 (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 26, 1999. Common Stock, No Par Value 4,653,358 - -------------------------- ---------------- Class Number of Shares 1 of 14 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MCCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, SEPTEMBER 30, 1999 1998 (unaudited) -------------- --------------- ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 2,859,200 $ 1,924,006 Accounts Receivable (Net) 21,497,600 24,235,761 Inventories 58,344,272 38,873,477 Net Investment in Sales Type Leases - Current Portion 4,300,000 3,100,000 Prepaid Expenses 371,940 543,095 ------------- -------------- Total Current Assets 87,373,012 68,676,339 ------------- -------------- Property and Equipment 45,322,878 42,100,575 Accumulated Depreciation (20,859,569) (18,834,030) ------------- -------------- Net Property and Equipment 24,463,309 23,266,545 ------------- -------------- Net Investment in Sales Type Leases - Less Current Portion 8,335,772 6,013,959 ------------- -------------- Other Assets 1,389,482 2,290,124 ------------- -------------- Total Assets $ 121,561,575 $ 100,246,967 ============= ============== 2 of 14 3 LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES Current Portion of Long-Term Debt $ 3,300,000 $ 3,300,000 Accounts Payable 29,215,830 18,405,224 Accrued Liabilities 5,530,732 4,537,434 Federal and State Income Taxes 1,438,139 513,994 -------------- --------------- Total Current Liabilities 39,484,701 26,756,652 -------------- --------------- Deferred Income Taxes 2,215,000 2,215,000 -------------- --------------- Long-Term Debt - Less Current Portion 48,476,019 42,530,105 -------------- --------------- Product Liability 1,627,337 1,909,904 -------------- --------------- Stockholders' Equity 29,758,518 26,835,306 -------------- --------------- Total Liabilities and Stockholders' Equity $ 121,561,575 $ 100,246,967 ============== =============== See notes to consolidated financial statements. 3 of 14 4 MCCLAIN INDUSTRIES, INC. CONDENSED COLSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED Three Months Ended Nine Months Ended June 30, June 30, 1999 1998 1999 1998 ---------------------------- ----------------------------- Net Sales $ 42,932,485 $33,441,088 $101,946,172 $80,681,338 Cost of Sales 35,247,417 27,487,916 83,666,479 65,977,131 ------------ ----------- ------------ ----------- Gross Profit 7,685,068 5,953,172 18,279,693 14,704,207 Selling, General And Administrative Expenses 4,683,884 3,548,809 12,023,313 10,086,462 ------------ ----------- ------------- ----------- Operating Income 3,001,184 2,404,363 6,256,380 4,617,745 ------------ ----------- ------------- ----------- Other Income (Expense) Interest Expense (1,019,744) (826,462) (2,654,269) (2,402,986) Interest Income 381,596 311,133 1,141,328 930,865 Other Expense 2,303 (277,581) (99,963) (524,734) ------------ ----------- ------------- ----------- (635,845) (792,910) (1,612,904) (1,996,855) ------------ ----------- ------------- ----------- Income Before Income Taxes 2,365,339 1,611,453 4,643,476 2,620,890 Provision for Income Taxes 804,000 551,000 1,579,000 891,000 ------------ ----------- ------------- ----------- Net Income $ 1,561,339 $ 1,060,453 $ 3,064,476 $ 1,729,890 ============ =========== ============= =========== Net Income per Common and Common Equivalent Shares $ .33 $ .23 $ .65 $ .37 ============ =========== ============= =========== Weighted Average Number of Common and Common Equivalent Shares Outstanding 4,669,552 4,684,439 4,669,552 4,684,439 ============ =========== ============= =========== See notes to consolidated financial statements 4 of 14 5 MCCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED NINE MONTHS ENDED JUNE 30, 1999 1998 ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 3,064,476 $ 1,729,890 ============ ============ Adjustments to reconcile net income to net Cash used in operating activities: Depreciation and amortization 2,451,924 2,586,766 Common Stock Issued in Lieu of Cash 10,114 15,367 Changes in Operating Assets and Liabilities Which Provided (Used) Cash: Current Assets Excluding Cash & Cash Equivalents (17,761,479) (12,837,896) Other assets (1,776,788) 388,080 Accounts payable 10,810,606 5,929,413 Accrued liabilities 993,298 672,022 Federal Income Tax 924,145 1,221,526 Other liabilities (282,567) (21,494) ------------ ------------ TOTAL ADJUSTMENTS (4,630,747) (2,046,216) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (1,566,271) (316,326) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (3,293,071) (1,590,134) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Additions to long term debt 5,945,914 1,900,263 Sale of common stock -- 61,369 Redemption of common stock (151,378) (441,000) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 5,794,536 1,520,632 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 935,194 (385,838) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,924,006 2,402,421 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,859,200 $ 2,016,583 ============ ============ See notes to condensed consolidated financial statements. 5 of 14 6 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1999 1. Basis of Presentation The accompanying unaudited Consolidated Financial Statements of McClain Industries, Inc. and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring items considered necessary for a fair presentation have been included. Operating results for the three-month and nine month periods ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending September 30, 1999. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1998. 2. Inventories Inventories at June 30, 1999 and September 30, 1998 are summarized as follows: (Unaudited) June 30, 1999 September 30, 1998 ------------- ------------------ Materials and Supplies $ 40,228,168 $ 22,100,252 Work in Process 7,652,852 5,707,374 Finished Goods 10,463,252 11,065,851 ------------- ------------- $ 58,344,272 $ 38,873,477 ------------- ------------- 3. Earnings per Common Share and Common Equivalent Share: Earnings per share are computed using the weighted average number of common shares outstanding during the year. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", effective September 30, 1998. This statement requires a dual presentation and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the potential dilution of all common stock equivalents. At June 30, 1999, and 1998 options to purchase 183,339 and 199,464 shares, respectively, were excluded from the computation of earnings per share because the options' exercise prices were greater than the average market price of the common shares. 6 of 14 7 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1999 4. Depreciation For the nine months ended June 30, 1999 and 1998, depreciation charges were $2,096,308 and $2,245,321, respectively. 5. Contingencies Product Liability As a manufacturer of industrial products, the Company is occasionally subjected to various product liability claims. Such claims typically involve personal injury or wrongful death associated with the use or misuse of the Company's products. The Company is currently defending certain legal proceedings involving allegations of product liability relating to products manufactured and sold by the Company. Historically, such claims have not resulted in material losses to the Company in any one year, and the Company maintains product liability insurance in amounts believed by management to be adequate. Galion Holding Company (GHC), pursuant to an indemnification it provided to the seller in connection with GHC's July 1992 acquisition of the Galion operations, is currently defending a number of legal proceedings involving product liability claims arising out of products manufactured and sold prior to the acquisition. These claims are covered by insurance and many of these cases have been settled. In addition, the acquisition agreement called for the seller to share in the payment of certain costs related to the defense of these cases. On December 29, 1998 the Company reached a settlement agreement with the seller, the terms of which called for the Company to release the seller from its obligations related to product liability claims under the Galion acquisition agreement in exchange for a cash payment of $1,050,000. A reserve to provide for these product claims was established at the acquisition date. Since many of the cases have been settled and insurance coverage exists, management believes that the ongoing costs to defend these claims will not exceed the amount accrued on the accompanying consolidated balance sheet at June 30, 1999. 7 of 14 8 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1999 Environmental Matters The Company's operations are subject to extensive federal, state and local regulation under environmental laws and regulations concerning, among other things, emissions into the air, discharges into the waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. Inherent in manufacturing operations and in owning real estate is the risk of environmental liabilities as a result of both current and past operations, which cannot be predicted with certainty. The Company has incurred and will continue to incur costs, on an ongoing basis, associated with environmental regulatory compliance in its business. Labor Union Matters Certain of the Company's hourly employees are represented by various labor unions pursuant to collective bargaining agreement which expire between September 1999 and June 2000. On February 23, 1995, the National Labor Relations Board (NLRB) conducted an election in response to a petition filed by a local union (Union) to represent the hourly employees at the Company's Macon, Georgia plant. The ballots of certain employees were challenged as ineligible. The Union filed charges asserting that the Company committed various unfair labor practices, which affected the election results, and that the challenged ballots should be counted. On October 17, 1996, the NLRB upheld the unfair labor practice charges and on November 5, 1996, the NLRB determined that the results of the election were in favor of the Union. Management, based upon the opinion of counsel, does not believe a final decision upholding the Union certification or the unfair labor practice charges would have a material adverse effect on the Company. Other Legal Matters The Company is also involved in routine litigation incidental to its business. Management believes that the resolution of these matters will not materially affect the consolidated financial statements. 8 of 14 9 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1999 6. Year 2000 Compliance The Company purchases the various computer hardware and software used in the administration of its financial, manufacturing and engineering processes from third party suppliers. A centralized computer and software is used for approximately 90% of the financial and manufacturing applications of the Company and certification has been received from both the hardware and software suppliers that these products are Year 2000 compliant. The engineering software is run on either a LAN (local area network) or individual personal computers depending on the size of the manufacturing facility. All the necessary hardware and software for the engineering is Year 2000 compliant. Additionally, the Company has various stand alone personal computers and portable computers that run word processing, database and spreadsheet software. The Company is currently in the process of upgrading all the software run on these stand alone computers with versions that are Year 2000 compliant and estimates completion of this project by the end of the Company's fiscal year on September 30, 1999. To date, the Company has expended approximately $60,000 to make its engineering hardware and software and certain of its stand alone computers and software Year 2000 compliant and estimates that it will expend approximately $30,000 on its remaining computers and software. These amounts represent approximately 50% of the Company's technology budget for the fiscal year ended September 30, 1999 and will be paid from the cash flow generated by the Company's operations. The Company believes that the steps it has taken regarding the Year 2000 issue will allow operations to run normally on January 1, 2000 and thereafter. The possibility exists however, that certain stand alone computers or software may not be upgraded timely of unforeseen circumstances may arise that interrupt certain areas of the Company's business or operations. In the case such an occurrence, management believes that it can correct the problem within a few days with no material interruption to its business or operations. The Company has made no formal assessment concerning the status of its customers or suppliers regarding the Year 2000 issue. If any of the Company's significant suppliers or customers do not successfully and timely become Year 2000 compliant, the Company's business or operations could be adversely affected. The Company has not yet generated and does not intend to generate any disaster contingency plans related to the Year 2000 issue. 9 of 14 10 MCCLAIN INDUSTRIES, INC. ITEM TWO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report. Selected financial data for the Company for the periods indicated: (Unaudited) (Unaudited) Three Months Ended Nine Months Ended June 30, March 31, 1999 1998 1999 1998 -------------------------------- --------------------------------- Net Sales $42,932,485 $33,441,088 $101,946,172 $80,681,338 Net Income 1,561,339 1,060,453 3,064,476 1,729,890 Net Earnings Per Common And Common Equivalent Share $ .33 .07 $ .65 $ .37 (Unaudited) As of As of June 30, September 30, 1999 1998 --------------- -------------- Working Capital $ 47,888,311 $ 41,919,687 Total Assets 121,561,575 100,246,967 Long-Term Debt 48,476,019 42,530,105 Stockholder's Investment 29,758,518 26,835,306 Weighted Average Number Of Common and Common Equivalent Shares Outstanding 4,669,552 4,684,439 Current Ratio 2.21:1 2:57:1 Long-Term Debt to Equity Stockholders' Investment 1.63:1 1.59:1 10 of 14 11 MCCLAIN INDUSTRIES, INC. The following table presents, as a percentage of net sales, certain selected financial data for the Company for the periods indicated: (Unaudited) (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 1999 1998 1999 1998 ---------------------- ----------------------- Net Sales 100.00% 100.00% 100.00% 100.00% Cost of Sales 82.10 82.20 82.07 81.78 ------ ------ ------ ------ Gross Profit 17.90 17.80 17.93 18.22 Selling, General & Administrative Expenses 10.91 10.61 11.79 12.50 ------ ------ ------ ------ Operating Income 6.99 7.19 6.14 5.72 Other Expenses (1.48) (2.37) (1.58) (2.47) ------ ------ ------ ------ Income before Income Taxes 5.51 4.82 4.56 3.25 Provision for Income Taxes (1.87) (1.65) (1.55) (1.11) ------ ------ ------ ------ Net Income 3.64% 3.17% 3.01% 2.14% ------ ------ ------ ------ 11 of 14 12 MCCLAIN INDUSTRIES, INC. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Net sales increased 28.4% to $42.9 million for the quarter ended June 30, 1999 (Quarter 1999) from $33.4 million for the quarter ended June 30, 1998 (Quarter 1998). The increase was due primarily to strong sales by the Company's McClain E-Z Pack and McClain Truck divisions. Sales for McClain E-Z Pack increased 65.0% or $3.7 million for the Quarter 1999 over the Quarter 1998. While McClain Truck sales increased 23.8% or $1.3 million during the Quarter 1999 compared to the Quarter 1998. Sales of the Company's other product lines were flat for the Quarter 1999 compared to the Quarter 1998. The sales of the McClain Truck division accounted for 17.4% of the Company's sales for the Quarter 1999 compared to 17.2% of the Company's sales for the Quarter 1998. Cost of goods sold decreased to 82.1% for the Quarter 1999 from 82.2% for the Quarter 1998. The gross profit margin on manufactured products decreased to 20.0% for the Quarter 1999 compared to 20.8% for the Quarter 1998. This decrease resulted primarily from the recognition of a credit of approximately $.4 from the State of Ohio's workers' compensation fund in the Quarter 1998. The gross profit margin for the McClain Truck division increased to 8.1% for the Quarter 1999 from 3.6% for the Quarter 1998. Selling, General & Administrative Expenses increased slightly to 10.91% of net sales for the Quarter 1999 from 10.61% of net sales for the Quarter 1998. Net sales increased 26.4% to $101.9 million for the nine months ended June 30, 1999 (nine months 1999) from $80.7 million for the nine months ended June 30, 1998 (nine months 1998). The increase was due primarily to strong sales by the Company's McClain E-Z Pack and McClain Truck divisions. Sales for McClain E-Z Pack increased 55.6% or $9.5 million for the nine months 1999 over the nine months 1998, while McClain Truck sales increased 94.1% or $9.2 million during the nine months 1999 compared to the nine months 1998. Sales of the Company's other product lines were flat for the nine months 1999 compared to the nine months 1998. The sales of the McClain truck division accounted for 18.7% of the Company's sales for the nine months 1999 compared to 12.2% of the Company's sales for the nine months 1998. 12 of 14 13 Cost of goods sold increased to 82.1% for the nine months 1999 from 81.8% for the nine months 1998 due primarily to the higher percentage of truck sales discussed previously. The gross profit margin on manufactured products increased to 20.5% for the nine months 1999 compared to 20.2% for the nine months 1998. This increase is the result of reduced steel prices and increased production, providing overhead reductions at certain of the Company's manufacturing facilities. The gross profit margin for the McClain Truck division increased to 7.0% for the nine months 1999 from 4.1% for the nine months 1998. Selling, General & Administrative Expenses decreased to 11.79% of net sales for the nine months 1999 from 12.5% of net sales for the nine months 1998 as a result of the increased sales volume and the continued restructuring of certain administrative processes. The Inventory has increased to $58.3 million at June 30, 1999 from $38.9 million at September 30, 1998. Approximately $23.0 million of the inventory consists of trucks and related equipment the Company has dedicated to its truck ready program. This increase is the result of the Company's decision in the fourth quarter of fiscal 1998 to more aggressively pursue a market for package units consisting of a truck chassis and a piece of equipment manufactured by the Company (Roll-Off Hoists, Refuse Truck Bodies and Dump Bodies) that it believes is currently expanding. The Company had working capital of $47.9 million at June 30, 1999 compared to $41.9 million at September 30, 1998. The ratio of current assets to current liabilities was 2.21:1 at June 30, 1999 and 2.57:1 at September 30, 1998. The Company's cash and cash equivalents totaled $2.9 million at June 30, 1999. Cash flows used by operations were $4.6 million for the nine months ended June 30, 1999, primarily due to the increased inventory dedicated to the Company's truck program as discussed previously. On July 9, 1999 the Company revised its debt agreement with its principal lender that expanded its existing line of credit to $35.0 million, its term debt to $18.5 million and the line of credit for its leasing subsidiary to $15.0 million. This new agreement provides additional working capital for the inventory expansion previously discussed and the Company's growing leasing program. The Company was in violation of two of its debt covenants at June 30, 1999. The Bank has issued a waiver of its rights related to these covenant violations. 13 of 14 14 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McCLAIN INDUSTRIES, INC. Date: August 13, 1999 By: Kenneth D. McClain ----------------------------- ------------------------------ Kenneth D. McClain, President Date: August 13, 1999 By: Mark S. Mikelait ----------------------------- ------------------------------ Mark S. Mikelait, Treasurer 14 of 14 15 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 27 Financial Data Schedule